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Balance of Payments Analysis
Balance of Payments Analysis
Balance of Payments
It is a systematic record of all economic transactions that take place between the residents of the reporting country and the rest of the world (ROW) during a specific period of time.
Balance of Payments
Double entry book keeping system All transactions that involve a transfer of title or ownership
Current Account : current transactions involving import and export of goods and services Capital Account : Capital transactions resulting in increase or decrease in countys total stock of capital Official Settlement Account :Changes in Foreign Exchange reserves and reserves of monetary gold held by monetary authorities
Current Account
Current Account
Invisible transactions
Travel on account of business, education , health Insurance premium and payments of claims
Incomes from services like advertising, commissions, pensions, patent fees, royalties, membership fees, subscription to periodicals etc
Capital Account
direct investment in shares or bonds, real estate, physical assets like plant, building, equipment etc Portfolio investments in government securities or securities of firms
Amortisation of capital
Capital Account
Purchase of short term securities such as treasury bills, commercial bills etc Speculative purchases of foreign currencies Cash balances held by foreigners
Assistance provided by international financial institutions like the IMF, World Bank etc
Credit Debit
Net
2. 2.1
2.2
Loans
a. External Assistance b. Commercial borrowings c. Short Term Borrowings 2.3 2.4 2.5 Banking Capital Rupee Debt Service Other capital
3. 4.
5.
5.1 5.2
*decrease +; increase -
Balance of Trade
Difference between the value of import and export of merchandise or visible items
Exports > imports : Favourable Balance of Trade Exports < Imports : Adverse Balance of Trade
+ Balance on Services
+ Net income on Investment
A deficit on Current Account implies that the reporting country is a net debtor i.e. it owes money to the rest of the world.
Overall Balance
Balance on Current Account + Balance on Capital Account
Double entry accounting system Any adverse balance on current account is made good by a surplus on current account and viceversa This is the accounting point of view
Autonomous Transactions : these are genuine transactions of current or capital nature. They are guided by long term considerations and are intended at optimisation of returns
Accommodating Transactions : these are short term adjustments, induced transactions
Basic Balance
Basic Balance = Balance on Autonomous Transactions = Balance on Current Account + Net long term capital movements
BOP Equilibrium
Balance of payments is said to be in Equilibrium when the Basic Balance is zero. i.e. Balance on Current Account + Net long term capital movements = 0
Disequilibrium in BOP
The BOP is said to be in disequilibrium when a countrys autonomous payments are not equal to the autonomous receipts
Population growth
Import of technology Imports for price stabilisation
Business cycles
Changes in demand for exports
Inflation
Flight of capital
Monetary measures
Deflation Depreciation Devaluation Exchange control
Non-monetary measures
Export promotion measures Import control measures
Trade Policy
Objectives
Free Trade: No Artificial Restrictions on Import and Export Protection/ Protective Trade Policy: Barriers to Free Trade
Quantitative Tools
Qualitative Tools
Export Promotion Policies Child Labour content Environmental considerations Preferential Buying by the Government
Tariffs: Import Duties/ Custom Duties Quotas Subsidies: Land, electricity, lower interest rates, Tax concessions, other facilities at lower than market rates
Optimum Allocation of Global Resources Greater Employment, income, consumption leading to Greater Welfare Availability of wider variety of goods and services at cheaper rates Greater Competition and no monopoly Greater Equality of Incomes and wealth